Eight factors to sharpen your investment decision-making

06 September 2021

By Alexander Joshi, London UK, Behavioural Finance Specialist

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  • Summary
    • We suggest an eight-point plan to improve your investment decision-making
    • These tips can help you position your portfolio for the rest of this year and beyond
    • It’s always good to periodically review your investments – not just focusing on the performance, but also the process behind it
    • Improved investment decision-making can help you build portfolios capable of withstanding unexpected sell-offs in financial markets.
  • Full article

    As summer comes to an end, we help investors plan for the rest of the year with an eight-point plan to improve investment decision-making.

    Taking time for reflection

    With the pace of the global recovery being brought into question by accelerating COVID-19 cases and surging inflation, the summer break is a good time to reflect on many aspects of our lives and investments are no different. When it comes to evaluating investments, both the outcomes and the process that leads to them are important. It’s good practice to objectively and periodically review previous decisions with a view to refine future decision-making, and tweak portfolios if necessary.

    As with every year, significant events may lie ahead that provide both risks and opportunities for financial markets and your portfolio. These tend to be best navigated by investors with clear minds and processes.

    In trying to make the best investment decisions, we believe the following eight considerations can help to sharpen your thinking.

    1. Clarify your goals

    A good first step is to clarify why you want to protect and grow wealth, and review your finances and existing investments to ensure that they are aligned with this.

    Clarity in your holistic objectives, agreed with or communicated to an adviser, can make it easier to align investment decisions to them.

    2. Have a plan

    Having a goal is important, but creating a specific plan helps to achieve it. One with rationale, timelines and rules for what actions to take in different scenarios is even more valuable.

    In recent months, financial markets have been relatively calm with many equity markets setting fresh highs. But sentiment can turn quickly. A plan can be particularly useful in keeping you anchored during difficult market conditions, when investing may be tougher emotionally. For example, during times when the natural tendency can be to take actions that provide short-term comfort, potentially at the expense of long-term returns, like selling out in the midst of a downturn.

    3. Check your cash holdings

    Maximising your long-term returns while achieving your objectives is not just about what’s in your portfolio, but what is outside it too. Cash also has a role to play. Check it is being put to good use, as holding excessive cash balances can hinder wealth preservation as inflation erodes its real value over time.

    At times, holding cash for opportunistic reasons may have merit, if used well, but the success of timing such tactical investments only comes with hindsight. In practice, cash can sit on the sidelines for much longer than an investor anticipates. All the while the foregone returns from investing, which historically have outperformed cash, and the costs of inflation, drag on the value of your wealth.

    4. Expect the unexpected

    A pandemic, in its second year and with no endpoint in sight, is an event that few investors predicted. But unexpected events don’t make the world more uncertain. They simply show us how uncertain it already was.

    Investors, their investment processes and portfolios should always be prepared for negative shocks, because swings in the value of investments can occur extremely quickly. A diversified portfolio of quality assets, built to perform in different conditions for the long term, can be a good antidote for periods of heightened uncertainty.

    Implementing a process that can withstand changing market conditions may make it easier to stay invested and reap the benefits of time in the market.

    5. Rethink risk

    In every edition of Market Perspectives we discuss potential risks to economic growth and financial markets. For many investors, risk is synonymous with volatility. However, while volatility can be uncomfortable, it may not be the most material risk for investors.

    When putting capital to work to achieve long-term goals, the most material risk is decisions, or outcomes, that stop you from reaching these goals. By keeping a primary focus on your goals, you can think about market events in the context of whether and how they affect them.

    6. Recognise your biases and emotions

    Periods of market turbulence and downturns can stress investors, perhaps leading to poor long-term decision-making. It is when markets look most precarious that our behavioural proclivities can lead us astray.

    Building a decision-making process that is systematic and focussed on identified biases might help to reduce their impact. Delegating decision-making to experts with tried and tested processes and good track records may be advisable.

    7. Be patient

    To maximise overall returns, it can make sense to follow a robust process that balances long-term thinking, to generate the core investment returns, with more reactive and opportunistic short-term tweaks to allocations.

    This can temper a tendency to act during extreme market events, where a fear of doing nothing induces actions more harmful than staying with the status quo.

    Behavioural studies show that performance usually suffers through overtrading.

    8. Look beyond the headlines

    We often attach great importance to vivid events that affect us personally; an evolutionary trait designed to protect us from harm. In the face of uncertainty, we use rules of thumb (heuristics) that have provided us with rapid and effective decision-making throughout our evolution. Unfortunately, this can bias decisions if some information is overweighed at the expense of all other information.

    For those seeking to protect and grow their wealth, active investment strategies that focus on quality and companies that are well-positioned for long-term trends seem a sensible approach. In investing, every year provides risks, and opportunities, to be capitalised on by investors looking beyond the headlines.


Market Perspectives September 2021

Our investment experts highlight our main investment themes, looking at the outlook for the global economy, why we have raised S&P 500 earnings forecasts, prospects for UK rates, private markets and what the nearing COP26 climate talks mean for investors.

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